As increasing numbers of individuals enter treatment for alcohol dependence and abuse, an era of cost containment in health care challenges the cost effectiveness of traditional in patient treatment. Clinical evidence suggests that outpatient treatment for alcohol dependence and abuse may be as effective as in patient treatment, but the effectiveness and cost of various levels of intensity of outpatient treatment has not been assessed. Thus, given the range and severity of problems commonly found among alcohol treatment clients, a question remains of what is the optimum intensity of services for rehabilitation and whether this differs by gender, by ethnicity, and by mental health status. This submission proposes a controlled, random assignment comparison of day hospital outpatient treatment and traditional outpatient treatment in a heterogeneous population (N=1214; 34% women, 12% African American, and 10% Hispanic) of a large health maintenance organization's (HMO) substance abuse program. The HMO setting is an important "real world" environment in which to conduct such a study; it has a heterogeneous patient population, and such managed care settings are increasingly becoming the most common form of service delivery. The study compares the effects of day hospital treatment and traditional outpatient treatment during the course of the care provided, such as length of stay, completion rates, and during- treatment alcohol use. It compares post treatment outcome and improvement rates in the areas of alcohol consumption, levels of psychosocial functioning, and medical care utilization of the two regimens, and attempts to specify patient characteristics associated with successful treatment outcomes in each setting. Finally, it compares the costs of day hospital and traditional outpatient treatment, and assesses cost effectiveness and cost offsets of the two programs.